An extremist, not a fanatic

June 13, 2011

Miliband's power blindness

It is a cliché that the Labour party owes more to Methodism than to Marxism. Today’s speech by Ed Miliband highlights the witless vacuity that this can lead to. He says “we have to tackle the new inequality in this country between the top and everyone else.” And he complains that “over the last twelve years Chief Executive pay in Britain’s top companies has quadrupled while share prices have remained flat.”So far, so good. But why has inequality increased?Here, Miliband fails atrociously. Although the word “responsibility” appears 27 times in his speech, there’s one word he never uses - power. Rising top pay is attributed not to bosses’ power to extract rent from shareholders and workers, but instead to a lack of “values of responsibility“. Windy moralizing thus displaces any recognition of a key fact about capitalism - that it generates inequalities of power.Given this, it is no wonder that Miliband’s policy proposals are feeble. He says that “we also need to recognise – as many great companies do---that firms are accountable to their workers as well as their shareholders”. But the nearest he gets to a concrete measure to achieve this is to propose that an employee sits on remuneration committees. Otherwise, his main idea is for firms to publish the ratios of top to average pay - as if a day of bad headlines will be sufficient to curb bosses’ excesses.In the same spirit, his complaint about New Labour is about messages and morality: “we did not do enough to change the ethic we inherited from the 1980s” and “we sent out the wrong message to those at the top of society”. There’s no acknowledgement that New Labour failed to challenge the power of bosses - and, indeed, helped to entrench and legitimate that power insofar as it bought into the ideological fiction of the magic of leadership.The fact is, though, that bosses pay themselves a fortune not because they are especially bad people, but because they can. Miliband’s failure to see this represents a blindness about the nature of power in capitalist society. And his belief that all will be well if only people behave nicely contrives to be both hopelessly utopian and deeply conservative. Utopian, because significant moral change rarely happens simply because people ask nicely for it. And conservative, because it leaves unchallenged the basic hierarchical structure of capitalism.

It is widely accepted that the reduced role played by unions is one of the main causes of the decrease share of labour income as a share of GDP (alongside, technological progress, globalisation ect.). This is particularly so given the increasing reliance of Western economies on the tertiary sector, both for high-skilled and low-skilled services. It would be very difficult (and probably inefficient) to unionise these industries, as the workforce is very flexible, people change jobs, roles and careers more often than in manufacturing. By the same token, employee-ownership scheme such as coop might have limited application scope.

Nevertheless, a solution is needed to rebalance the bargaining relationship where prospective employees negotiate their salary and benefits terms individually and with no information on what the prospective employer is paying to prospective peer colleagues. This info asymmetry generates market failures, as the (prospective) employee that knows little of the match surplus gets a lower salary, and this fundamental piece of knowledge is linked to job tenure, which is not necessarily linked to productivity – this aspect could at least partly explain the growing inequality between age cohorts even if with the same education background. In my view, this is what could explain a growing premium for managerial positions, due to exclusive access to business insights rather than actual contribution to the success of the business overall.

In this respect, back in 1994 Paul Krugman noted that “[t]hat is certainly true is that the growth of inequality in the United States has a striking “fractal” quality: The pattern of widening gaps between education levels and professions is mirrored in the pattern of increased inequality of earnings within professions. Lawyers make much more in comparison with janitors than they did 15 years ago; but the best-paid lawyers also make much more in comparison with the average lawyer.” I believe that this fractal pattern of income inequality is very much at work nowadays.

Another distortion is that those employees that “search on the job” (i.e., employed workers looking for outside vacancies) get a better pay compared to those that are loyal to their employer. Also it is counterintuitive that employers wouldn’t try to retain employees that get a poaching offer, and that they prefer instead to incur turnover costs and lose a valuable employee. The reason may be that employers do not want to give a signal to the rest of the workforce that they are ready to renegotiate salaries – that is, they prefer to face turnover in order to perpetuate the coordination failure among employees, where only a minority search on the job – again, this skill is not necessarily linked to productivity.

To rectify this situation full transparency is needed on what employees are paid across the business organisation (privacy concerns should obviously be taken care of). In a nutshell, there is the need for increasing transparency in the labour market to the benefit of workers. This way, not only would employees be able to negotiate on a stronger basis, but also identify those prospective employers that offer better terms & conditions (transposing the advantages of working in a cooperative to corporations in general) – transparency will impede employers to price discriminate employees on the basis of their individual willingness to be paid, or skilfulness in job hunting.

On the demand side of the labour market, this would allow employers to differentiate themselves according to their equality of remuneration policy that strongly reflects a corporate culture of collaboration vs. inequality and divisive and spurious performance measurements. This source of differentiation in the labour market will be also reflected in a differentiation in the product market to the extent that the attitude of the workforce is a major determinant of product quality (e.g. service/professional firms).

Moreover, in consumer markets the powerful role that could be played by consumers (who by a large extent are also employees) must be acknowledged. This I believe is very much similar to Corporate Social Responsibility. (Something similar was successfully developed back in the ‘60s by Martin Luther King in Chicago to boycott those companies refusing to employ black people – it was called Operation Breadbasket.)

How then to raise consumer awareness on this embedded feature of the product or service bought (fair employment terms) on a much wider scale? Something similar to the use of the word “Organic” could be considered, or similar to the brand “Fair Trade”. Intervention to rectify info asymmetry in the labour market would allow the credible and verifiable use of a similar mark or code of conduct in order to lever the power of consumer sovereignty.

I don’t believe this solution would necessarily turn out to be inflationary, in that the point is that consumers (who for the majority happen to be employees) would favour companies that are relatively less profit oriented and decide to allocate a larger share to their labour force (i.e. a market-based mechanism to redress companies short-termism in a way that is compatible with modern market economies).

Policy is the same as what already proposed, publicising the ration between top and low salary, same stuff just more incisive. There is no need to do anything else, there will be a flurry of apps and online services assisting employee exerting power on the back of this information once made public.

"Which economic system other than your planned re-built Jerusalem doesn't? That operated by China, Russia, Cuba, Libya, Zimbabwe, North Korea?"

Any capitalist country with an incomes policy, tripartite labour policymaking, etc. For instance Finland, the Netherlands, Denmark, Belgium, etc. The perfectly bourgeois politicians who have both enacted and continue to support these structures would be very surprised to hear that doing so somehow makes them "Socialist", with a capital S to boot.